US Ambassador to Israel Martin Indyk said on Friday that the Jewish state should "share" Jerusalem with Christians and Muslims as Israeli and Palestinian negotiators in New York grappled with possible solutions to the dispute.

"Yerushalayim, a city so sacred and special to Jews, yet holy to Christians and Muslims too. There is no other solution but to share the Holy City," Indyk said using the Hebrew name for Jerusalem while receiving an honorary degree from its Hebrew Union College - Jewish Institute of Religion.

Palestinians backed off their demand Friday for full sovereignty over all of east Jerusalem, suggesting that a consortium of Islamic states take ownership of the area's disputed holy sites as separate US-mediated negotiations with Israel were due to resume in New York.

"It is possible to envisage solutions to all of the issues before us, even the toughest ones like Jerusalem and it is possible to reach a historic agreement that will put an end once and for all to the Israeli-Palestinian conflict," said the US ambassador.

Israel captured east Jerusalem along with the rest of the West Bank and Gaza Strip in the 1967 Middle East war.

The Jewish state nonetheless claims all of Jerusalem to be its "united and eternal" capital, despite UN resolutions.

The Palestinians hope to make east Jerusalem the capital of their future state - JERUSALEM (AFP)